State-contingent debt instruments could provide sovereigns with additional policy space in bad states of the world. This column presents an Excel-based tool that allows debt managers and investors to explore the impact of different designs of such instruments on public debt and gross financing needs under user-specified macroeconomic scenarios (both baseline and shocks). Illustrative results show the potential benefits of different bond designs on both debt and gross financing needs.

The case for state-contingent debt instruments, linking contractual debt to a pre-defined variable, has been theorised but not developed. This column gives a historical perspective of the issuance of these instruments to alleviate liquidity and/or solvency pressures on the sovereign in ‘normal times’ and during restructurings. It also discusses the valuable lessons that inflation-linked bonds provide for development of the state-contingent debt instrument market.

In the last two decades, there has been substantial co-movement of US and Eurozone interest rates. This column shows that the ECB’s unconventional monetary policy has largely succeeded in decoupling nominal interest rates in the Eurozone from those in the US since 2014. This has been especially true for rates of up to five years’ maturity since the rise in US interest rates following the election of Donald Trump.

In the wake of the Great Recession, the Federal Reserve took unprecedented measures to stem economic decline. This column uses the Fed’s open-market operations in 1932, another period of short-term rates near the zero lower bound, as a comparison for the QE1 operation of 2008-09. Although the 1932 policy boosted output and inflation, if the Fed had announced the operation in advance and carried it out for a full year, the Great Depression could have been attenuated considerably earlier.

The Eurozone lacks a safe asset that is provided by the region as a whole. This column highlights why and how European Safe Bonds, a union-wide safe asset without joint liability, would resolve this problem, and outlines steps to put them into practice. For given sovereign default probabilities, these bonds would be as safe as German bunds and would approximately double the supply of euro safe assets. Moreover, owing to general equilibrium effects, they would weaken the diabolic loop between sovereign risk and bank risk.

Investor demand for bonds is very high. This column argues that this is surprising because under almost any likely inflation scenario, including central banks merely hitting their target inflation rates, bondholders suffer large losses. The beneficiaries are sovereign and corporate borrowers; the losers are pension funds, insurance companies and some foreign exchange reserve funds. Meanwhile, the systemic risk from a bond crisis is increasing.

As Argentina’s protracted and litigious restructuring saga comes to an end, it is natural to ask what lessons the world can draw from this contentious process. This column takes a close look at Argentina’s ordeal, revealing just how idiosyncratic it has been. While it is therefore less influential than most people think, the long script yields important and unexpected lessons.

The ECB recently announced a new monetary operation – targeted longer-term refinancing operations, or TLTRO II – that essentially subsidises bank loans to the real economy. This column argues that this ‘cash for loans’ scheme, which might cost up to €24 billion, is unlikely to affect the real economy greatly. This is because banks can easily window dress their loans to qualify. TLTRO II also tests the limits of the ECB’s mandate by stepping into the fiscal policy space.

Economists continue to debate whether preferential treatment in financial regulation increases banks’ demand for government bonds. This column looks at bank purchases of government bonds and other types of bonds when constrained by a capital or liquidity requirement. Financial regulation seems to be a main driver of banks’ demand. If regulators wish to break the vicious circle from weak banks to weak governments, revising financial regulation seems to be a good starting point.

The diversity of European economic cycles, economic structures, and political dynamics is a strength of the Eurozone. However, sustainable arrangements are required to distribute risks and ensure that all countries can use fiscal policy to cushion economic downturns. This column proposes the creation of a system of stability bonds for the Eurozone. These could be structured to minimise moral hazard, improve governance, and ensure that fiscal policy can support growth during the next recession.

Central banks today provide liquidity exclusively through purchases of (mostly) government bonds and through collateralised open-market operations. This column considers the evolution of liquidity provision by central banks over the past two centuries, and argues that there are alternative approaches to those that are focused on today. One such alternative is a revival of the 19th century practice of uncollateralised lending. This would discourage market participants from relying on informational shortcuts, and reduce the likelihood that informational shocks trigger collateral crises.

There is growing concern – but little systematic evidence – about the relationship between sovereign default and banking crises. This column documents the link between public default, bank bondholdings, and bank loans. Banks hold many public bonds in normal times (on average 9% of their assets), particularly in less financially developed countries. During sovereign defaults, banks increase their exposure to public bonds – especially large banks, and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults.

Do incidental large-scale bond purchases have a global portfolio balance effect? This column argues that one country’s bond purchases can ease monetary conditions abroad. Whether this effect is welcome depends on the phase of the business cycle, but the authors emphasise that it is of paramount importance for resolving the current crisis that Eurozone policymakers closely consider the effects of large-scale bond buying.

Public debt held by non-residents has been on the rise over the last few decades – that is until the global crisis. This column looks at how the ownership of government bonds in the G20 and the Eurozone. It finds that increased foreign bondholders bring costs as well as benefits.

One of the most interesting questions arising from the ongoing Greek debt restructuring is what it implies about the feasibility of voluntary debt restructurings. Indeed, why would anyone voluntarily take a debt-exchange offer that promises a large reduction in repayments? This column argues creditors might feel safer with new debt instruments issued under English law than with old Greek-law regulated ones.

Today Italian five-year governments bonds are insured at 70 basis points above Spanish ones. In June it was the other way around. This column argues that this increase in Italian spreads is due not only to policy and communication failures but also to Berlusconi’s lack of personal credibility. The costs of such bad handling of the crisis could be of the order of €20 billion.

Can euro-area governments cushion the impact of the crisis without damaging market perceptions of their fiscal sustainability? This column suggests that euro-area sovereign spreads have typically reflected a common factor that mimics global risk repricing, not country-specific solvency concerns. But in the last year, market sentiments seem to have shifted to concerns about fragile national financial sectors and future debt dynamics.

In December 2009, government guarantees on the issuance of bank bonds will close to new issuance in many EU countries. This column argues that the guarantees have been effective and should be extended into 2010, despite improved market conditions and bank profitability. In doing so, governments should correct the schemes for some distortionary effects and develop a careful exit strategy.

Like flights, securities can be non-stop (direct claims) or they can involve (sometimes many) intermediate stops (indirect claims). How should we measure the vulnerability of different securities to "systemic risk"? This column proposes a simple index to capture the important information of interest to both regulators and investors.